Risk On, Risk Off - What is it?

The market sentiment seems to flip flop back and forth on a daily basis between a “Risk On” and a “Risk Off”. When you see the stock market increase significantly (US500, DOW30, etc), that is an indication that risk is “on”. A risk “on” environment is a mood of the market where investors feel good about the future prospects of the economy. Therefore, they take their capital and speculate in the stock market and high yielding instruments. This generally increases the value of the stock market and high yielding currencies which lately have been the Australian Dollars (AUD) and New Zealand Dollars (NZD). One pair I like to follow for this is AUD/JPY.

In a risk “off” environment, traders usually are buying safe haven currencies like the US Dollar (USD) or Japanese Yen (JPY). At times Swiss Franc (CHF), Gold, and US Treasuries (bonds) are bought as well as a flight to quality. When fear hits the markets traders tend to buy up these asset classes.